RBI to hold joint Audit of credit rating agencies with SEBI

Credit rating agencies will come under closer regulatory watch amid corporates battling bankruptcies, lenders taking hefty haircuts, and banks trying to prune sticky loans. The Reserve Bank of India (RBI) will conduct regular audit and inspection of rating agencies whose actions can significantly influence the borrowing price of all companies — including insolvent businesses looking for a second life. 

Till now, such audits were only carried out by the Securities and Exchange Board of India (Sebi), which has been monitoring rating agencies since 1999. Recently, communicating its decision to hold joint audit/inspection with Sebi, the central bank has asked agencies to avoid sharp downgrades that rattle investors, and exercise caution when corporates fish around to shop for a better rating, persons aware of the development told ET. 

RBI’s decision follows the mandate given to rating agencies to rate debt instruments based on the resolution plan prepared with the consent of lenders and bankruptcy court for reviving a company. 

A RBI spokesperson declined to comment on the subject. 

“Rating agencies, though not always correctly given the information gaps, faced the heat in recent years due to abrupt downgrades of companies like Amtek Auto and RCom. While there is exchange of information with RBI from time to time, it’s unclear when and how RBI would hold the audit, what are the parameters they would focus on,” said an industry official. 

Under the existing system all rating agencies have to be registered with Sebi while the banking regulator gives rating agencies the accreditation to carry out ratings on loans (of Rs 10 core and above), money market instruments like commercial papers and non-fund based banking facilities such letters of credit. The accreditation is given based on rating information. 

Loan ratings are significant for banks as higher risk weightage attached to unrated loans impair their capital adequacy level — which is the ratio between a bank’s capital (comprising equity, free reserves, tier-2 bonds) and its risk-weighted assets. RBI’s interaction with rating agencies began since 2007. About 25,000 companies are rated in the country, of which half are estimated to be below ‘investment grade’. 

While financial markets immediately come to know of defaults in bonds and debentures due to information sharing mechanism in the market for debt instruments (particularly listed securities), rating agencies get whiff of loan default long after the due date for payment. Neither banks nor RBI have till now agreed to give rating agencies the access to the data on default. #casansaar (Source - Economic Times)